Macroeconomics: The Day Ahead for 20 November

With the Nvidia Q3 earnings event overcome along with the unsurprisingly hawkish set of FOMC minutes, attention turns to the US September labour market report, as risk assets get a lift from those better than expected Nvidia results, above all the raised sales forecast. While this offers some relief from concern about the AI bubble bursting, the bigger question remains whether Nvidia’s customers are ‘over-investing’ in AI infrastructure, per se implying that Nvidia’s sales and outlook may be something of a lagging indicator as and when the tide goes out on AI euphoria. Be that as it may, the statistical schedule also has German PPI to digest ahead of the UK CBI Industrial Trends and Eurozone Consumer Confidence surveys, with US weekly jobless claims, KC and Philly Fed Manufacturing surveys and Existing Home Sales also on tap. There is also a busy run of central bank speakers, the Bundesbank’s monthly report and an expected 25 bps rate cut from South Africa’s SARB, while Walmart headlines US corporate earnings. There are also hawkish comments from BoJ’s Koeda calling for a rate hike, but a hawkish BoJ policy bias has been in place for such a long time, that FX markets will continue to focus more on concerns about the fiscal outlook, until such time the BoJ and MoF take action (rate hike and/or intervention) rather than continue to jawbone the JPY. Much the same applies to talk of yet another China property stimulus package, and all the more so given that all previous packages have so obviously failed to turn the tide in the sector.

** U.S.A. – September Labour Market data / October FOMC minutes **

As previously noted, a healthy dose of scepticism and caution needs to be applied to the catch up on all US data, and it will take a while before any real sense of underlying trends will emerge, both given likely reliability issues and the impact of the shutdown. September Payrolls are forecast to edge up to 55K, which is at or above the Fed’s current estimate of the employment breakeven rate (i.e. signalling a broadly balanced picture of labour demand), with the Unemployment Rate seen unchanged at 4.3%, while Average Hourly Earnings are expected to hold at 0.3% m/m 3.7% y/y, as is the Participation Rate at 62.3%. While the sharp rise in layoff announcements in recent months imparts some obvious risks to the labour market outlook, the fact remains that demographics and hefty restrictions on immigration will be a strong headwind to labour supply, and to addressing labour skills shortages. In terms of the Fed outlook, the FOMC minutes note that staff forecasts “relative to the forecast prepared for the September meeting, real GDP growth was projected to be modestly stronger, on balance, through 2028, reflecting stronger expected potential output growth and greater projected support from financial conditions. GDP growth after 2025 was expected to remain above potential until 2028 as the drag from higher tariffs waned, with financial conditions becoming a tailwind for spending. As a result, the unemployment rate was expected to decline gradually after this year before flattening out at a level slightly below the staff’s estimate of the natural rate of unemployment.” The minutes also noted that “Many (FOMC) participants, however, remarked that overall inflation had been above target for some time and had shown little sign of returning sustainably to the 2 percent objective in a timely manner“. “Many participants observed that the divergence between solid economic growth and weak job creation created a particularly challenging environment for policy decisions, requiring careful monitoring of incoming data to distinguish between cyclical weakness and structural changes in the relationship between output and employment”. In terms of the policy outlook: “Most participants judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate as the Committee moved to a more neutral policy stance over time, although several of these participants indicated that they did not necessarily view another 25 basis point reduction as likely to be appropriate at the December meeting. Several participants assessed that a further lowering of the target range for the federal funds rate could well be appropriate in December if the economy evolved about as they expected over the coming intermeeting period. Many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year”. As such a December rate cut therefore looks unlikely at the current juncture.